We are maintaining our fair value estimate for Apple (AAPL) despite a 6% stock decline Wednesday and a bout of recent selling pressure and stock price volatility. We believe many factors are at play regarding the stock price decline from an intraday high of $705.07 on Sept. 21 to an intraday low of $505.75 on Nov. 16.
Primarily, we believe investors have been taking gains in Apple, as the September price of $705 represented a 74% gain in nine months. We believe that such profit-taking was exacerbated in early November by U.S. President Barack Obama's re-election, which appears to have heightened concerns about the U.S. fiscal cliff and higher tax rates on investment capital gains. Since Apple was probably the largest investment holding and/or the biggest 2012 winner for many investors, we suspect the stock has likely been a casualty of any profit-taking or trimming of holdings by large investors. More recently, we suspect that technical investors are steering the Apple boat, as evidenced by the massive recovery in the 12 trading hours following the Nov. 16 low of $505, as the stock catapulted back to $566 by the end of the following trading day.
Other nontrading data points have come out in recent days that may have contributed to Wednesday's slide. Taiwanese trade paper DigiTimes reported that Apple's component suppliers might expect a 20% drop in component orders in the March quarter, thereby hinting at a sharp decline in Apple production and, ultimately, sell through. We aren't sounding the alarms for Apple on the basis of this report, as DigiTimes' sources have not always exhibited an accurate record and component orders are always subject to change based on improving or deteriorating forecast product demand.
Another potential negative catalyst was Nokia's (NOK) agreement with China Mobile (CHL) to sell the Windows-based Nokia Lumia 920T on the carrier's TD-SCDMA 3G network. We don't believe that this deal prohibits Apple from someday selling the iPhone with China Mobile, which is a key catalyst in our thesis for further iPhone growth in the long term, given China Mobile's massive subscriber base of more than 700 million people. At the same time, we are taking a wait-and-see approach toward Nokia and Windows phones in general, and availability with a given carrier is not a guarantee of future success.
Finally, at an investor conference Wednesday, the CEO of AT&T Mobility (T), Ralph de la Vega, hinted that the carrier expects to sell 26 million smartphones in 2012, which implies 9.3 million devices in the fourth quarter, about equal to smartphones sold in the fourth quarter of 2011. Given the high proportion of iPhones sold by AT&T as a percentage of total smartphones, one could interpret this to presume that the iPhone 5 launch is not faring significantly better than the 4S launch in 2011. We view this data point as a slight negative, as it would imply that Apple and its loyal base of iPhone customers with AT&T might not wildly exceed expectations. However, we certainly don't see this news as a death blow either, as we think these comments still point to solid iPhone 5 sales with the carrier.
More important, the comparison with the year-ago quarter at AT&T and Apple is not exactly apples-to-apples, as the iPhone 5 was launched Sept. 21 and initial sales were included in AT&T’s third-quarter results, versus the 4S launch Oct. 14 where opening weekend sales were captured in the fourth quarter. Additionally, while AT&T is a key iPhone carrier and the U.S. is Apple's most important iPhone market today, we can see a scenario where iPhone sales at Verizon Wireless (VZ) or Sprint (S) exceed expectations and contribute to an overall strong iPhone 5 launch. We also have not seen enough evidence that Nokia's Windows phones, Google 's (GOOG) Nexus 4 phones made by LG, or Samsung's relatively older Galaxy S III phones are putting a serious dent in Apple's iPhone 5 momentum just yet. We keep a close eye on the competitive dynamics of the smartphone market, especially during this important holiday season, but we are maintaining our fair value estimate for Apple at this time.
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